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Top Stock Kroton’s School-Loans Growth Decelerates

Kroton Educacional SA (KROT3), the best- returning stock among Brazil’s top 100, is no longer investors’ favorite education company.

Kroton is gaining less than for-profit university rivals Anhanguera Educacional Participacoes SA (AEDU3) and Estacio (ESTC3) Participacoes SA in 2013 after last year’s 152 percent rally. Kroton, which became the top provider of online courses through acquisitions, probably will grow at a slower pace after adding the most students using the government’s Fies loan program, said Bruno Giardino, a Banco Santander SA analyst in Sao Paulo.

“Anhanguera has a much bigger potential base for Fies students than Kroton and Estacio,” said Sandra Peres, an analyst at brokerage Coinvalores. Estacio raised 768.7 million reais ($391.2 million) in a January share sale and may boost purchases to expand into online learning, she said.

Demand for advanced degrees in Brazil is booming as a middle class that grew by 40 million people in the eight years through 2011 sees higher education as the path to better jobs and bigger paychecks. The government seeks to boost state and private university enrollment by almost 50 percent to 10 million by 2020 from 6.7 million now.

Anhanguera was the best-performing education stock this year through yesterday with a 19 percent gain, followed by 17 percent for Estacio and 15 percent for Kroton. That compares with an 8.2 percent drop for the benchmark Bovespa index.

Kroton fell 0.4 percent to 26.45 reais at the close in Sao Paulo. Anhanguera rose 0.6 percent to 41.20 reais, while Estacio dropped 1.8 percent to 47.85 reais.

Kroton Discount

Kroton trades at an 84 percent discount to Anhanguera and 34 percent to Estacio, based on trailing price-earnings ratios in the past 12 months. About 43 percent of Kroton undergraduates have Fies loans with interest rates of 3.4 percent, less than half the nation’s 7.25 percent benchmark rate. That tops the 27 percent of students at Anhanguera and 19 percent at Estacio, Bradesco BBI analysts said in a Feb. 15 report.

“There is a closing in distance among the companies,” said Luciano Campos, an analyst at HSBC Bank Brasil SA in Sao Paulo, who has an overweight recommendation on Estacio and rates Kroton as underweight. Strong growth at Kroton is already priced into his estimates, he said.

U.S. Contrast

The rally in Brazilian for-profit universities contrasts with the regulatory scrutiny of their U.S. peers amid complaints that recruiters pressure students to enroll and dodge questions about the programs’ cost. A Senate report found last year that their marketing expense tops instruction spending and that more staff is devoted to signing up new students than ensuring the success of their existing ones.

Apollo Group Inc. (APOL), the biggest U.S. for-profit university, plunged 61 percent in the past year through yesterday, while the second-largest, DeVry Inc. (DV), lost 14 percent.

The struggles of U.S. education companies aren’t likely to be repeated in Brazil, Banco Santander’s Giardino said.

“Because they are cost-competitive and have standardized curricula, academic quality is much better than that offered by local institutions,” he said.

Kroton probably will report an 87 percent jump in annual revenue when it releases financial results on March 19, based on analysts’ estimates compiled by Bloomberg. That’s more than twice the projected 33 percent increase for Valinhos, Brazil- based Anhanguera and four times the 20 percent gain at Estacio.

‘Very Interesting’

“The growth we have been seeing wouldn’t be so relevant without Fies,” said Carlos Lazar, Kroton’s investor relations director. Kroton plans to invest more in 2013 than it did last year, he said.

“Although we are up a lot, we have an upside that is still very interesting for investors and we have more to deliver,” Lazar said in a telephone interview from Belo Horizonte, where the company is based.

More-profitable distance-learning courses, conducted online or in satellite classrooms with students and teachers sometimes separated by thousands of miles, also helped, said Coinvalores’ Peres, who is based in Sao Paulo.

“Kroton wasn’t playing around” when it made distance learning a pillar of its strategy, Peres said. About 66 percent of the company’s student body is signed up for distance learning. Anhanguera has 36 percent of its enrollment in similar courses, compared with 19 percent at Estacio.

‘Very Ambitious’

“We have very ambitious distance-learning growth plans,” said Marcos Lemos, executive director of distance learning at Estacio. The Rio de Janeiro-based company’s distance-learning segment will “not necessarily be growing through acquisitions” and will expand organically around the country, he said.

Anhanguera declined to comment on Fies funding and distance-learning expansion.

Even with an burgeoning middle class, industry growth may reach its zenith in 2015, said HSBC’s Campos. Colleges already offer more seats than there are students to fill them, he said.

“People are buying the stock like there won’t be a peak, like there are no limits to the growth,” Campos said. “The sector is attracting investors because of potential for growth and also because it offers protection against a slowing economy. Whether that’s really the case remains to be seen.”

Investors remain bullish because more families are seeing education as an opportunity to get better jobs, said Jorge Simino, chief investment officer at pension fund Funcesp.

“Families that can finally get a higher education will defend this,” Simino said in an interview at Bloomberg’s Sao Paulo offices on Feb. 27. “They won’t give it up.”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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